How McDonalds Global Strategy Has Enabled It to Achieve the Levels of Performance It Has - Case Study Example

Global Strategy: McDonald’s Introduction McDonald’s is the world’s largest fast food chain and one of the most valuable and recognizable brands. The first McDonald’s was opened in 1940 by brothers Richard and Mac McDonald in San Bernadino, California. Their business model was based on the value proposition of providing high quality fast food at a significantly lower cost as compared to its competitors (McDonalds Corporation 2013). Ray Kroc, a milkshake mixer salesman from Chicago, saw McDonald’s potential in 1954 and having expressed interest in the business he would negotiate a franchise deal with the McDonald’s brothers to allow him franchise McDonald’s. McDonald’s, with its distinctive Golden Arches, has subsequently grown to become the world’s largest food chain operating in 119 countries with 34,480 restaurants and employing over 1.8 million people who serve more than 52 million customers daily (McDonalds Corporation 2013). McDonald’s main product offering includes French fries, hamburgers, sandwiches, chicken products, wraps, breakfast items such as the Egg McMuffin, soft drinks, shakes, desserts, salads and other localized offerings specific to the market it operates in such as fish and lamb. Currently, over 80% of McDonald’s restaurants (27,882) are franchised (McDonald’s Corporation 2013). McDonalds as a corporation has been one of the best performing companies in the global restaurant sector. From its humble beginnings, the corporation has raised its dividend for more than 25 consecutive years since it started paying dividend in 1976 and earned its place among the Standard and Poor’s (S&P) 500 Dividend Aristocrats (AP 2013). In recent times, between 2007 and 2012, McDonald’s total revenues increased from $ 22 billion to over 27 billion. The company’s first quarter results for 2013 also show an increase in profits despite a reduction in annual global sales. McDonald’s has also posted continuous monthly sales increases for more than nine years until October 2012 (AP 2013). This report will examine how McDonald’s global strategy has enabled it to achieve the levels of performance it has over years. The report will first provide a brief overview of McDonald’s “Think global, act local strategy” and identify the key drivers of this global strategy. The report will then examine some of the challenges facing the global strategy in order to achieve higher levels of performance and offer suggestions on how some of these challenges can be overcome. McDonald’s Global Strategy McDonald’s global strategy represents a convergence of globalization and local culture or a reconciliation of global integration with national differentiation which seeks an optimal combination of global standards with local adaptation. Following its rapid growth and expansion in the domestic (American) market, McDonald’s has been able to achieve rapid global expansion through franchising, which capitalizes on its brand equity (McDonald’s Corporation 2013). This has been augmented by a marketing strategy which focuses on offering both standardized product offerings on its menu as well as adapting to meet local tastes and preferences of the market in which it operates and to comply with the customs and laws of the host market (Vignali 2001). While items such as the Big Mac (beef burger) are offered in markets such as the United States, the menu in markets such as India is adapted to comply with the dietary religious restrictions on the predominant Hindu population who do not eat beef (Harding 2000). Instead, the Chicken Maharaja Mac is offered as a culturally acceptable variant. In markets such as China and Japan where fish is popular, the Tuna Mac is offered while in New Zealand and Australia the Serious lamb burger and Kiwiburger which includes beetroot and egg as ingredients are offered on the menu (McDonald’s New Zealand 2012, Vignali 2001). Beyond tastes and preferences, McDonalds also strives to meet local standards such as obtaining halal certification and not offering any pork products such as bacon in predominantly Muslim markets such as Singapore and Malaysia or separation of meat and dairy products consistent with kosher guidelines (not serve cheese with Big Macs) in Israel (Vignali 2001). Drivers of McDonald’s Global Strategy There are several drivers of McDonald’s global strategy which have contributed to its rapid growth and expansion. Business Model McDonald’s business model plays an integral role in its global strategy. The company primarily operates as a franchisor though it still directly operates a number of restaurants. A majority of McDonald’s restaurants (27,882) are operated as franchises which helps McDonald’s control the costs of expansion and deliver locally relevant and profitable customer experiences (McDonald’s Corporation 2013). However, directly operating some restaurants enables McDonald’s to provide company personnel with experience on how to operate restaurants and to develop and refine operating standards, marketing concepts and product and pricing strategies- the most successful of which will be rolled out to other restaurants. This business model has helped McDonald’s optimize overall global performance. Knowledge of Local Markets McDonald’s global strategy is driven by its knowledge of local markets which has enabled successful penetration of the markets it operates in. This knowledge is driven by consumer and market research to establish local conditions, cultures, regulations and consumer tastes and preferences. As an illustration, McDonald’s introduced the Serious Lamb Burger following independent market research which indicated the popularity of lamb in New Zealand. The research concluded that 82 percent of the respondents preferred lamb despite 65 percent not being able to afford it and the lamb burger was subsequently introduced to consolidate its market share (McDonalds New Zealand 2012, Maxwell 2012). In India, McDonald’s has kept pork and beef off the menu as well as clearly segregating the food on the menu along vegetarian and non-vegetarian lines to avoid offending India’s vegan sensibilities (Harding 2000). Research also helps establish what reasonable price levels are in each host market. For example, prices are higher in markets such as China as compared to India where income levels are lower (Harding 2000). It is this knowledge of host market conditions through research which enables McDonald’s to execute its marketing strategy. Price Model One of the key value propositions for McDonald’s remains offering high quality food at an affordable price as compared to its competitors. McDonald’s global pricing strategy takes into account multiple factors in the host market while setting the price for its products. For instance, the two year research and development process which preceded the introduction of the serious lamb burger in New Zealand considered the affordability prime export quality lamb as the major obstacle to domestic lamb consumption in New Zealand despite its immense popularity (Rae 2012). Similarly, McDonald’s has been forced to offer economical meals to meet the needs of the low income population in India. McDonald’s has a value pricing strategy in most of its markets where Value Meals are offered combining menu items (combos) to allow consumers to purchase them at a discount. For instance, a typical combo would offer a customer a discount for buying a Big Mc, French fries and a Coke. McDonald’s price strategy also utilizes promotional pricing where different menu items are packaged together at an affordable price as compared to its competitors (Zuber 2001). An example is the successful dollar menu in the American market which capitalizes on the low income end of the market. Quality and Standardization A key driver of McDonald’s global strategy is quality through standardization. McDonald’s strives to ensure that its standard offerings all meet a global quality standard. The French fries sold at a McDonald’s in Singapore or Germany will be the same in quantity and quality as those sold in New Zealand and Australia (Cohen 2005, Chase et al 2004). McDonald’s achieves this by conducting a series of corporate inspections on each franchise to ensure that they meet the global standards. Each restaurant is subjected to Field Operations Review (FOR) and System Observation Review (SOR) inspections annually. McDonald’s also conducts stringent audits of each of their suppliers of raw materials in each host market- beef, pastry, tea, eggs and other ingredients (Chase et al 2004). McDonald’s also creates long term partnerships with suppliers and monitor supply to ensure that all raw materials meet required standards and ensure food safety. As an example, they have established relationships with Beef and Lamb New Zealand and the Federated Farmers of New Zealand for the supply of Angus Beef and Lamb for McDonald’s New Zealand restaurants (Rae 2012). In the United States of America, a large number of franchises receive their pastry and tea from Sara Lee (Chase et al 2004). In 1961, McDonalds also established the Hamburger University in Illinois which serves as a training facility for McDonalds’ restaurant managers, mid-managers and owner/operators on the various aspects of operating restaurants. A Hamburger University was also established in 2010 in Shanghai, China- one of McDonald’s fastest growing markets (McDonald’s Corporation 2013). Challenges facing McDonald’s Global Strategy In the course of its rapid growth and expansion, McDonald’s has often come under criticism from several environmental activist groups for its environmental policies and practices particularly those relating to packaging and waste management (Price & Lawson 1992). The global nature of McDonald’s operations has been criticized for its negative impact on the environment through water consumption, waste generation, greenhouse gas emissions and energy use. To overcome this challenge, McDonald’s must ensure that it continues to adhere to its environmental sustainability framework and invest more in environmental corporate social responsibility. It should also invest more in using recyclable and re-usable packaging to reduce its negative impact on the environment (McDonald’s 2012). McDonald’s has also been continually subjected to criticism and protests over the effect of its product offerings on the health of its consumers with a large number of nutritionists attributing increased cases of obesity to consumption of McDonald’s products (Price & Lawson 1992). McDonald’s has frequently been accused of using its billion-dollar advertising campaign to target children with the net effect of promoting unhealthy dietary habits (Santora 2002). This has generated a lot of bad press for the company and undermined its global sales (Stern & Kazaks 2009). McDonald’s local adaptation strategy has also been faced by the challenge of cultural adaptation in some markets. While McDonald’s has realized success in penetrating markets such as China and Japan where income levels are higher, it still faces resistance in markets such as India and where it is increasingly being viewed as a threat to traditional methods of farming and ecology (Harding 2000). This challenge can be overcome by positioning their menu items as products with nutritional value and introducing healthier snack options. Marketing efforts should emphasize on depicting the range of fresh, organic ingredients that go into making most of its popular burgers such as lettuce, tomato and onion and re-positioning items such as snack wraps as healthy alternatives (Price & Lawson 1992). Conclusion McDonald’s rapid growth and expansion in only five decades to become the world’s largest fast food chain and one of the most recognizable and valuable corporate brands globally can be attributed to its global strategy which optimally combines global standardization with national differentiation or local adaptation. The key drivers to the success of this global strategy include its business model, knowledge of markets which is essential for execution of strategy, its pricing strategy and its quality and standardization controls. However, McDonald’s has faced several challenges in executing this global strategy which relate to criticism over the impact of the operations of its restaurants on the environment as well as the increasing clamor for healthy lifestyles which have led nutritionists to assign blame to McDonalds’ for increasing cases of obesity . These challenges can be overcome through adhering to an environmental sustainability framework, investing more in environmental corporate social responsibility and positioning menu items as food with nutritional value, not just fast food. References Associated Press (AP) 2013, ‘McDonald’s Profit Rises, but Year-Over-Year Sales Fall’, The New York Times, April 19. Retrieved on May 29, 2013 from < http://www.nytimes.com/2013/04/20/business/mcdonalds-profit-rises-but-year-over-year-sales-fall.html?_r=0> Chase, R, Jacobs, F, Aquilano, N 2004, Operations Management for Competitive Advantage (10th Edition), McGraw-Hill Irwin; Boston. 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